6 - South America: Achieving Sustained Growth

Summary

HOW THE CRISIS AFFECTED SOUTH AMERICA

South American countries have a long, infamous tradition of suffering economic crisis. Nevertheless, the current global crisis is radically different from previous episodes in its genesis, its impacts and its most likely evolution. This paper studies the effect of the crisis in four South America economies that are members of the PECC (Chile, Colombia, Ecuador, and Peru, henceforth called South America) and the policy responses by monetary and fiscal authorities. The storyline can be summarized in five simple conclusions: (a) this crisis was externally driven; (b) South America has had good preconditions and policy space to weather the crisis and used it reasonably well (except for Ecuador); (c) the recovery is underway and, in fact, better than in more advanced economies (North America and Europe); (d) however, the region is too small to determine its own macroeconomic prospects; but (e) there are several policies it can do to keep its credibility and finances intact.

This economic downturn did not start at home; South American economies have been casualties of the “toxic assets” crisis and the poor response of policy-makers in the United States and Europe. Contrary to local traditions, this crisis has not been accompanied by financial sector turmoil or collapses in the balance of payments, nor has it caused apparent damage to the financial sectors beyond the expected credit tightening of any cyclical downturn. The crisis has been largely confined to the real sector, in particular to foreign trade. At this writing, it also appears that the aftermath of the crisis will not be as severe as in some previous cycles. An early recovery seems to be at hand, at least for the most advanced regional economies.

As discussed below, three of the four South American economies were better prepared to face the crisis than had been the regional norm in previous downturns. Consequently, they have managed to escape the adverse shock relatively unharmed, due to a combination of years of prudent fiscal policy, sound banking systems, low foreign indebtedness, and massive international reserves.